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IT and Divestitures: What CIOs Should Know, Part 2

Addressing the IT separation challenges companies often face during divestitures.

The four common divestiture models—sale, spin-off, joint venture and asset trade—can challenge CIOs in very different ways. While they all involve changing the ownership and operating structures of a business asset, each model has its own performance metrics, timelines, regulatory and legal considerations, and value drivers.

To support the strategic and financial goals of a divestiture deal and to keep separation costs from spiraling out of control, CIOs should understand the complexities, benefits, and challenges of each model, says Asish Ramchandran, a principal at Deloitte Consulting LLP who serves as the information technology lead for the National Mergers, Acquisitions, Divestitures and Restructuring practice. “Understanding how these models might affect IT can help CIOs develop more effective IT separation or integration strategies,” he says.

In the first article in this series, we discuss how CIOs at divesting companies can approach sales and spin-offs. In this article, we examine joint ventures and asset trades, and the IT challenges each presents.

Divestiture Model 3: The Joint Venture

By contributing partial ownership of a business asset into a joint venture (JV) with a partner, divesting companies can share risk and split costs, while remaining actively involved in operating the asset.

For CIOs, this divestiture model can prove particularly challenging because when a JV deal closes, the two parties to the transaction must find a way to collaborate on strategy, operations, IT issues, governance, and decision-making. CIOs may be able to avoid problems down the road by structuring IT asset ownership agreements and operating strategies in a way that protects the seller legally and financially, while providing enough flexibility to minimize this tension and accommodate future changes to the JV. “For the JV to evolve without conflict, there should be governance structures in place that make it easy for two parties to come together and then, if necessary, separate,” says Varun Joshi, a principal at Deloitte Consulting LLP.

Ramchandran adds that there are additional steps CIOs can take to manage such complexities and prevent them from undermining IT processes and strategies. “CIOs should identify and understand the success metrics of the joint venture, and the business and operating processes that the partners will share in the JV,” he says. “If you identify redundant processes and capabilities, or unnecessary complexities that have implications for IT, then you can work with each party to address them, or build your IT strategy to accommodate them.”

Finally, CIOs may choose to work with the deal teams from both companies, before the deal closes, to organize the JV’s IT operating environment, and determine the staff, systems, and processes it will require. Moreover, CIOs should consider creating governance structures and an exit strategy in case the JV ends abruptly. “They need to have a clear delineation in the deal agreement of who will pay for what IT costs should the JV dissolve. Without such a plan in place, CIOs can get stuck with JV-related IT costs for both parties,” says Ramchandran.

Divestiture Model 4: The Asset Trade

Companies with complementary capabilities or resources occasionally trade assets which, as with JVs, can provide a means for managing risks and costs. For CIOs on both sides of the deal, the primary challenge this infrequently used divestiture model presents is ensuring that, from an IT perspective, the complexity inherent in trading two business assets does not result in the deal becoming two labor-intensive transactions: a divesture and an acquisition.

“In an asset trade—more than with the other divestiture options—CIOs need to do extensive due diligence and blueprinting before the deal ever closes,” says Ramchandran. “Taking the time to understand the functional nuances and true costs of this model, and creating plans that leverage existing and complementary IT systems, assets, and processes in each asset can help CIOs keep IT costs down and avoid the two-transaction nightmare.”

Joshi notes that in asset trades, time can be a constraining factor that can drive up expenses, particularly if back office infrastructure is accompanying an asset. Integrating another company’s back office systems and processes into your own often takes much more time than CIOs have during the transition period. “You might be inheriting a real dog of a back office system and IT professionals who are unfamiliar with your culture,” he says. “All of this can slow down an integration effort and, in turn, drive up costs.”

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While each of the divestiture models described in this series may be deployed broadly to structure a carve-out, no two divestitures are exactly alike. Each has its own drivers, goals, and costs. Likewise, each presents CIOs with a unique set of challenges and considerations. By understanding the nature of the deal being negotiated, its timelines, and the demands it may place on IT, CIOs can structure their divestiture-related work in ways that minimize transition times and support their company’s strategic objectives.

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